Betting on the house

PowerShares to roll out home-builder, sector ETFs

By

JohnSpence

BOSTON (MarketWatch) -- PowerShares Capital Management, a relative newcomer to exchange-traded funds, is further challenging the status quo in the $250 billion business with a slew of new offerings, including ETFs tracking the home-construction and defense industries, scheduled to launch Wednesday.

Among the eight portfolios expected to debut are ETFs that invest in nanotechnology, building and construction, as well as aerospace and defense. The new funds would take the total number of ETFs managed by the Wheaton, Ill.-based firm, known for its arguably "enhanced index" strategies, to 31 funds.

PowerShares has set itself apart from the bigger players in the ETF business such as Barclays Global Investors, State Street Global Advisors and Vanguard Group, which manage funds that take a pure passive-index approach. PowerShares track sophisticated indexes co-developed by the American Stock Exchange that seek to identify "best of breed" companies within a particular market segment to provide what it calls benchmark-beating performance.

In some ways, the PowerShares ETFs resemble certain "quant" funds that attempt to slightly outperform indexes by overweighting or underweighting stocks, while maintaining the basic risk characteristics of the benchmark.

"They're doing far better far more quickly than anyone could have expected," said Jim Wiandt, industry observer and editor of the Journal of Indexes.

"I think initially it was legwork, and now they seem to have gotten over the hump," he added.

Sector power plays

One ETF expected to launch Wednesday, PowerShares Dynamic Building & Construction Portfolio, may attract interest given the recent strength of home-building stocks. Although the sector has pulled back recently on fears the housing market may be cooling, the Dow Jones U.S. Home Construction Index
DJ_HOM
is up 48% over the past year with mortgage rates at historically low levels.

The fund is expected to hold 30 stocks, with about 40% of assets held in home-building stocks such as D.R. Horton Inc.
DHI, +0.52%
and Lennar Corp.
LEN, +1.02%
It will also invest in stocks from related industries such as suppliers Lowe's Companies Inc.
LOW, -2.04%
and Home Depot Inc.
HD, -1.94%

Since ETFs trade like stocks, the fund will allow investors to take positions in a basket of construction stocks throughout the day.

"This ETF may draw some attention to home-builder stocks at the margins, although it looks to be geared more toward institutional investors," said Bill Mack, equity analyst at Standard & Poor's.

Yet he added investors may be hesitant jump into the fund, which would have an expense ratio capped at 0.6%, given the sector's recent run.

However, since the ETF could be shorted, investors may use it to hedge their exposure. Some ETFs tracking the best-performing sectors posted high levels of short interest in September relative to total assets. See MarketWatch Weekend Investor.

Another PowerShares ETF expected to begin trading Wednesday would track the Spade Defense Index
DXS, -2.39%
a basket of companies involved with defense, homeland-security and space exploration. For the year to date, the index is up more than 3%, and top holdings include Boeing Co.
BA, -4.47%
and United Technologies Corp.
UTX, -1.75%

For better or worse, the fund could be used as a short-term vehicle to play geopolitical developments such as terrorist attacks.

Finally, a new PowerShare tracking an index of nanotechnology stocks could make a splash with investors given the sector's potential growth. Nanotech companies develop materials and devices at the atomic and molecular level for a wide range of uses.

Archipelago Holdings Inc.
AX, -1.68%
earlier this year hinted at plans to list a separate nanotech ETF, its first, on its electronic exchange. Read previous story.

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